Political Violence and Greenfield Foreign Direct Investment in Natural Resources

In this paper the heterogeneous effect of political violence on Greenfield Foreign Direct Investment is examined using the predictions from real options theory. We hypothesize that political violence reduces overall FDI inflows, as violence increases uncertainty and operating costs. Yet, this effect is expected to be smaller for secessionist conflicts than for conflict concerning national authority, as secessionist conflicts are more geographically concentrated. In addition, we hypothesize that FDI in the natural resource sector is less sensitive to political violence than FDI in manufacturing and services, since MNEs active in the natural resource sector are more restricted in their location choice and the economic rents associated with natural resource extraction can offset the negative effects of political violence on profits. We find evidence for these hypothesizes. In addition, we empirically show that the insensitivity of natural resource FDI to political violence is related to the existence of limited investment options and high resource rents.